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Foxconn Swings to Loss on Lower Prices, Higher Costs

By

Jeffrey Ng And

Aries Poon

Updated March 31, 2011 4:33 a.m. ET

Foxconn International Holdings Ltd.
2038 -3.55%
said Thursday it swung to a net loss last year on higher production costs and falling product prices, and the contract handset maker said it must urgently step up efforts to cut costs and secure new customers.

The change in the company's fortunes comes as demand for sophisticated mobile gadgets such as
Apple Inc.'s
AAPL -1.51%
iPhone has grown at the expense of the less advanced products Foxconn makes for customers such as Nokia Corp. and
Motorola Inc.
MSI -0.21%
Analysts said Foxconn's reliance on Nokia, which accounts for as much as half of its revenue and may soon start cutting orders, as well as the slow pace with which Foxconn has shifted production to lower-cost inner China could continue to hurt profitability this year.

Foxconn, a unit of Taiwan's
Hon Hai Precision Industry Co.
2317 0.11%
, the world's largest contract electronics maker by revenue, said in a statement Friday its net loss for the 12 months ended Dec. 31 totalled US$218.3 million, compared with a net profit of US$38.6 million in 2009.

Revenue fell 8.2% to US$6.63 billion from US$7.21 billion a year earlier.

"We need to take decisive actions to conclude our capacity relocation, optimize our cost structure and return to profitability. We need to serve our existing customers better and approach more new customers," Foxconn Chairman
Samuel Chin
said in a statement.

The company earlier announced plans to move its main production base to Langfang, in northern China's Hebei province, to mitigate rising labor costs.

Foxconn also faces a challenge after Nokia said in February it will adopt Windows Phone as its main smartphone platform as part of a broad strategic partnership with
Microsoft Corp.
2317 0.11%
Analysts said the move could result in the company cutting its orders with Foxconn during a two-year transitional period following the deal's announcement.

Barclays Capital analyst
Kirk Yang
said Foxconn will have another tough year this year "due to limited upside for Nokia and Motorola in smartphone assembly outsourcing...rising labour and raw material costs, while the small volume of tablets [made by Foxconn will likely] fail to compete with the iPad."

HSBC analyst
Yolanda Wang
said smartphones will likely account for less than 10% of Foxconn's revenue this year, which she attributed to a "lack of an effective smartphone strategy."